Banking Sector Strong but Credit Growth Remains Subdued – BoG

The Governor of the Bank of Ghana, Dr. Johnson Asiama, has described Ghana’s banking sector as sound, profitable and well-capitalised, despite continued weakness in credit growth to households and businesses.

Speaking at the opening of the 129th Monetary Policy Committee (MPC) meeting, Dr. Asiama said the health of the banking industry remains a critical pillar for financial stability and for the effective transmission of monetary policy decisions to the broader economy.

“The banking sector remains sound, it remains profitable, and it remains well capitalized. We have asset quality improving meaningfully over the past year,” he said.

According to the Governor, improvements in the sector are evident in stronger balance sheets and better asset quality, which signal a gradual recovery in the financial system following recent economic adjustments.

Importance for Monetary Policy

Dr. Asiama explained that the strength of the banking sector plays a vital role in determining how effectively the central bank’s policy decisions influence borrowing conditions in the economy.

He noted that when the banking system is stable and functioning efficiently, adjustments to the central bank’s policy rate are more likely to translate into changes in lending rates and credit availability for businesses and households.

“The extent to which changes in the policy rate translate into credit conditions for households and businesses is important,” he stated.

However, the Governor indicated that credit expansion within the economy has remained relatively subdued, a development that policymakers are carefully assessing.

Credit Growth Still Constrained

Dr. Asiama said the central bank is currently examining whether the slow pace of credit growth is being driven by supply-side factors within the banking industry or by weak demand from borrowers.

Supply-side constraints could include banks maintaining tighter lending standards, strengthening capital buffers or exercising caution due to non-performing loan levels.

“We need to evaluate whether the constraint is from the supply side, whether it’s still on the side of banks, or is it from the demand side, which is on the side of the borrowing public,” he explained.

On the demand side, businesses and households may also be reluctant to take on new loans due to economic uncertainty or the cost of borrowing.

Implications for Economic Recovery

The Governor stressed that while the resilience of the banking sector is encouraging, weak credit growth could slow the pace of economic recovery and limit the effectiveness of monetary policy in stimulating economic activity.

“This committee was asked to exercise discipline in the face of improvement… but today the judgment required is more complex. We must make our decision at the intersection of domestic success and external uncertainty,” Dr. Asiama noted.

The Monetary Policy Committee is expected to consider these dynamics carefully as it deliberates on the appropriate policy rate and broader monetary policy direction in the coming months.